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Can economics solve financial injustice?

Joseph E. Stiglitz

Nobel Laureate in Economic Sciences, 2001

Joseph E. Stiglitz isn’t shy of tough questions. The Nobel Laureate of 2001 has been Chief Economist of the World Bank as well as Chairman of the Council of Economic Advisors to former US president Bill Clinton. Whatever arena he enters, 'Gentleman Joe' reaches the top.

As a public speaker, he hits the headlines by tackling the most hostile issues of our time. With brutal honesty, he debates topics like climate change, financial crises, the Eurozone and the widening gap between the rich and poor. He’s been published by Vanity Fair as well as Financial Times, and interviewed by nearly every TV network across the globe. The economist is an unmistakable opinion leader whose sharp mind is paired with an incomparable moral approach. It’s this voice for the poor that comes up whenever he talks about the imperfections of markets.

How can you convince people that being selfish helps no one?

Stiglitz sees the inequality of our global societies as the root of the worst conflicts in our "wrong ruled economy". He knows, of course, that nobody in society likes to pick up the tab for other people, but Stiglitz still proclaims:

Get new questions as they launch

The economist points to the top one percent of our society, who in his opinion, are responsible for the growing gap between rich and poor.

"Let me give you an example," he says, straightening up his chair to talk about quantitative easing, which is when a country’s central bank introduces more cash into the economy. "I understand the drive for it, given that the fiscal policy wasn’t working, but think about how that works: It basically floods the economy with liquidity. In fact, investment is lower as a percentage of GDP, which props up stock prices. And who wins when the stock price goes up? Those who own the shares! Who is that? The people at the top. What about the poor retirees depending on government bonds for their retirement? Their interest rates have gone down. This is a policy that has not led to more growth but more inequality."

How can we solve financial inequality?

Why can’t we create jobs for people who want to work?

Even if some politicians and economists are optimistic about recent social and economic developments - the robust US stock market and low unemployment rates for example - Stiglitz always comes back to hard statistics.

Income in the middle of the United States is lower than it was 25 years ago, medium income of a full-time male worker is lower than it was 40 years ago and the real wages at the bottom are lower than they were 60 years ago.

Source: Joseph E. Stiglitz

The economist seethes at politicians who rave about welfare programs. "These people don’t wanna be on welfare, they wanna work for a living! And yet our economic system has failed them. They’re right to be angry."

Who’s to blame for the financial crisis?

Stiglitz believes that this anger - the anger of those who feel left behind - is the natural social repercussion of a market that doesn’t work. The most recent case: the financial crisis of 2008. When it comes to who’s responsible for millions of Americans losing their homes and their jobs, Stiglitz doesn’t hesitate.

"My theories had explained why it was so important to regulate", Stiglitz says, his voice getting louder and more impassioned, "and since one of the central problems with the financial market was gathering information, we shouldn’t expect the financial sector to work well. Anybody who studied history knew that they had repeatedly behaved badly. So, to me, the economists who said we didn’t need regulations were in part to blame for the deregulation that allowed the bankers to behave so badly."

Paul Donovan Global Chief Economist UBS Wealth Management

In the aftermath of any major economic upheaval there’s a tendency to look for a single culprit, a scapegoat who can carry the burden of responsibility. This offers a conveniently simple narrative, and a conveniently simple solution: one thing is wrong, redress that wrong and the problem can never occur again. The danger with the scapegoat approach is that it’s incomplete. Crises are complex events with complex causes, and taking a simple scapegoat approach may create a dangerous complacency when other causes of the problems are overlooked.

Joseph Stiglitz correctly identifies the banking sector as a major cause of the 2008 / 2009 financial crisis. There is no doubt that people working in banks made huge errors. However, putting all of the blame on banks and banks lobbying for deregulation, and putting faith in future reregulation as a bulwark against future crises, seems a dangerously narrow interpretation of the factors building the crisis.

The idea that banks collectively pursued a common goal of deregulation, leading to the crisis, suggests a degree of direction and coordination that anyone who has worked in a bank can testify does not exist. Banks did want deregulation, but many politicians were ideologically in favor as well. The credit cycle was supporting prosperity and prosperity is always politically popular. Indeed politicians went so far as to castigate banks for not doing enough to lend to low-income earners in the years before the crisis. Banks were told to stop using ‘unreasonable measures of creditworthiness’. There were threats of fines for banks that did not lend to certain lower income groups.

In addition to politicians, two other groups must take some responsibility. In the years before the financial crisis, the media (in particular the financial media) were aggressive in support of leverage and castigated those who pursued more staid banking policies. As media stories, regardless of their accuracy, have an impact on the share price of a company, the management of banks was judged by a standard that was skewed in favor of risk-taking. The behavior of bank managements was shaped by this climate.

And finally, when it comes to the borrowers themselves, some may have been borrowing unrealistic amounts - and while social pressures and rising income inequality might have aggravated this, they should share some of the responsibility.

None of this is to deny that banks and limited regulation conspired to create the crisis. But an approach which focuses on the banking sector and ignores or exonerates other factors, risks creating another crisis. Media and politicians pushed banks to take risks, perhaps excessive risks. Society pushed borrowers to borrow unrealistic amounts of money. A somewhat broader assessment of the causes of the crisis than those offered by Joseph Stilglitz would be prudent.

What role did economists play in the financial crisis?

Can we create a more equal world?

Stiglitz doesn’t believe that there’s an overnight fix for the economy. But there is an agenda, he says, that can bring the economy back to strong growth. And as a growing number of disenfranchised citizens search for hope in right-wing parties, it’s needed now more than ever.

We wrote the rules once before to make the economy more unequal, and now we have to rewrite them once again to make them more equal.

This is a nod to one of his latest books ‘Rewriting the Rules of the American Economy’. But it’s not only the ‘why?’ on his mind; Stiglitz knows there are several ways to achieve a more equal world. "Give workers more bargaining rights, curb the power of corporations, create better corporate governance, curb the power of the financial sector, which grew from 2.5 percent to 8 percent of GDP, with no evidence of any increase in productivity of our economy as a whole, and plenty of evidence of increased instability and inequality."

Where does this voice for the poor come from?

Born in 1943, only a few years after the horrors of the Great Depression, Stiglitz spent his childhood in Gary, Indiana, a poor, industrial town defined by racial discrimination, high levels of inequality and episodic unemployment. It was his parents who encouraged him to do something to benefit all members of society.

Stiglitz High School Portrait 1953-1954

Stiglitz earned a full scholarship to Amherst College, where he originally had his heart set on physics. But he soon recognized that a degree in economics would be the best way for him to tackle social inequality. And so he began working on his PhD at the elite Massachusetts Institute of Technology.

How can people believe that markets always work?

After studying (and living through) recessions, depressions and financial crises, Stiglitz succeeded in undermining the presumption that markets always work. He said this was because they operate on imperfect, or ‘asymmetric’ information - in other words, markets in which one party has better, or more information than the other. This, in Stiglitz’s view, was a primary contributor to economic inequality. The research won him the Nobel Prize in 2001, shared with George Akerlof and Michael Spence. Together they defined an alternative school, which changed the field profoundly.

Was economics based on fraud?

Is globalization responsible for suffering?

With the help of his Nobel-winning economic framework, Stiglitz uncovered many more gaps in our system - and found possible solutions to plug them. He swings back and forth from studying micro economies to macro economies. "Because different countries are in different situations", he says, "and we need basic norms that apply to everywhere."

Stiglitz is not a defender of globalization, and knows it can be responsible for humanitarian suffering. "Developing countries need to be able to pursue their development. So in my mind, for instance, we need global rules about climate change, to say: If you pollute, you can’t trade. You can’t sell us goods produced in your factories that are contributing to global warming."

How can we make globalization work for everyone?

If you ask Stiglitz how he stays focused on all the different issues of our future economy, he remembers one moment in his life: Washington D.C, August 28th 1963. Stiglitz was one of 250,000 people who stood in front of the Lincoln Memorial to hear Martin Luther King declare his famous words, "I have a dream".

"It was such a moment, a moment not only of a speech, it was a moment of faith in American democracy". But the economist becomes wistful when he admits that King’s dream has yet to be realized. "I don’t think he fully realized how bad things were going to get in the area of economic divides. And his speech is, in a sense, a marker in our history and something that all of us need to consider when we think about where our country is going."

What’s the most important thing for people to learn?

This moment of emotional introspection is quickly interrupted by his assistant; a meeting with some other professors is next on the agenda. The workaholic takes his last moment to give advice to the young, and shares an important message he received from his parents.

First, they said: money will never make you happy. Secondly, they said: God has given you a great brain. Use it. And the third thing they said is: be a service to others.

Is that the secret of his success? "One always has to think about what is the best way of winning the battle." The laureate smiles. "But I guess it was that mixture of idealism: what mattered was what you did, and your ideas! And maybe a mild dose of overconfidence."

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